So, you have been laid off or left your previous employer. This transitional period may be full of decisions, such as balancing unemployment insurance, health care insurance, and other important life decisions. Of course, retirement planning is still important, but what are your options with your old 401(k)?
Stay in the existing plan
Most companies will allow you to keep your retirement savings in their plans after you leave. Your money will continue growing tax deferred. However, if you have less than $5,000 in your account, your money may be automatically cashed out and sent to you.
As you progress through your career it is likely that you will have multiple employers. According to a Bureau of Labor Statistics 2019 study, the average worker who was born between 1957 and 1963 held an average of 12.3 jobs during their career. If you choose to leave your 401(k) at each employer that you leave, by the end of your career you may have several accounts that you need to keep track of. Multiple 401(k)s may also lead to certain plans not being aligned with your risk tolerance as you move closer to retirement.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Move the money to a new employer’s plan
If you start a new job with an employer who offers a 401(k) plan, you will be able to roll over your assets to the new plan. This will give your assets the ability to continue growing tax deferred while consolidating into one plan. Most 401(k)s have a wide range of investment options, but you will still be limited to the investment funds offered within the new plan.
Roll over the money to an IRA
You can roll over the funds to an IRA with a bank or brokerage firm. This IRA can be used every time you need to roll over a 401(k) without having to open a new account each time. The money will continue growing tax deferred and will be available for you in retirement. Some 401(k)s allow for a post-tax Roth contribution. If your former contributions were going into the Roth, you can roll the money into a Roth IRA.
IRAs offer you more investment choices than 401(k)s as you can invest in anything from stocks, bonds, mutual funds and more. There are many online platforms that enable investors to buy and sell investments on their own. But if this sounds like it is outside your comfort level, you can find a financial adviser who will help you manage your investments while planning for retirement.
Cash out
Cashing out your 401(k) is an option, but it should be considered only if there is an immediate need for the money. This option will set you back when planning for retirement. The withdrawal will be taxable at both the federal and state level and you may incur an early withdrawal penalty of 10% if you are not yet 59.5.
Withdrawing from a traditional 401(k) will always be taxable, but there are a few ways to avoid the early withdrawal penalty. The IRS allows you to withdraw your money if you stopped working for your former employer in or after the year you reached age 55. However, this exception does not apply to assets rolled over to an IRA. Additionally, if you have been laid off due to COVID-19 the CARES Act now allows withdrawals up to $100,000 penalty free. The CARES act also allows the taxes from this withdrawal to be spread out over a three-year period.
If finances are tight and you need the money today you can withdraw money if you deposit the funds back into an IRA within 60 days. This strategy is known as an indirect rollover and will avoid the taxes and penalties. This can be a short-term solution if your intention is to keep your money dedicated to retirement, but you need a short-term cash infusion today.
Whether your departure from your previous company was planned or an untimely surprise, your decision on how you handle your 401(k) can be a choice within your control. In many ways this interruption or job transition may be the start of a new chapter in life. This new chapter does not have to interrupt your retirement planning and financial well-being. Being informed on your options will help you thoughtfully move into the future with your retirement savings.
-
Tariffs, Inflation, Uncertainty, Oh My: How to Feel Less Stressed About Finances Now, ReallyTariffs, high prices and an uncertain economy getting you down? These steps can help.
-
IRS Updates Capital Gains Tax Thresholds for 2026: Here’s What’s NewCapital Gains The IRS has increased the capital gains tax income thresholds for 2026. You'll need this information to help minimize your tax burden.
-
Your Estate Plan Isn't 'Done' Until You've Completed These Five Steps, From an Estate Planning AttorneyCongratulations on getting your estate plan in order. Now, you need to communicate the relevant details to ensure your plan is effectively carried out.
-
A Nightmare for Parents: How to Navigate the Legal Boundaries of Tenant Rights During a Family CrisisThis family's story illustrates how important it is to get help sooner rather than later and highlights the complexities of tenant rights and legal protections.
-
Eight Steps to Help Get You Through the Open Enrollment Jungle at WorkWondering how to survive open enrollment this year? Arm yourself with these tools to cut through the process and get the best workplace benefits for you.
-
Seven Moves for High-Net-Worth People to Make Before End of 2025, From a Financial PlannerIt's time to focus on how they can potentially reduce their taxes, align their finances with family goals and build their financial confidence for the new year.
-
I'm a Financial Planner: These Are the Seven Tiers of Retirement Well-BeingLet's apply Maslow's hierarchy of needs to financial planning to create a guide for ranking financial priorities.
-
Why More Americans Are Redefining Retirement, Just Like I DidRetirement readiness requires more than just money. You have a lot of decisions to make about what kind of life you want to live and how to make it happen.
-
A Compelling Case for Why Property Investing Reigns Supreme, From a Real Estate Investing ProInvestment data show real estate's superior risk-adjusted returns and unprecedented tax advantages through strategies like 1031 exchanges and opportunity zones.
-
Are You Retired? Here's How to Drop the Guilt and Spend Your Nest EggTransitioning from a lifetime of diligent saving to enjoying your wealth in retirement tends to be riddled with guilt, but it doesn't have to be that way.
